The dangers of emotional investing: can you trust your gut?

The dangers of emotional investing: can you trust your gut?

How do you make decisions?

It can be a strange question, when you think about it. Because we make decisions all the time, but how we do it can go about unchecked a lot of the time.

And if small decisions like “what outfit to wear today” can have limited impact on your future, decisions regarding your finances can be trickier.

That is one of the reasons why our financial marketplace features investment products that require no active management decisions and are simple to use.

A decision regarding an investment can be one of the best ones in your life. On the flipside, a poor decision can haunt you for quite some time.

What is the beginner investor to do?

Our recommendation always goes in the direction of having a plan, but it is understandable that sometimes emotions are hard to ignore.

Since emotions have the potential to override rational thinking, let’s see what this can mean for your investing journey.

Excitement and overconfidence can hinder your diversification

At the time of this piece being written, there is an ongoing atypical event going on in the stock market with the behavior of Gamestop stocks.

In a few words, a group of investors detected what they are calling a fundamental mistake on the side of some professional hedge funds. Essentially, they bought into positions where they were betting that this stock would devalue over time giving them the chance to buy at a lower price to achieve a higher profit – a short.

Given their exposure, these funds had to purchase more and more of this stock as the demand grew, making it rapidly grow in value.

What followed can present itself as a peril for unseasoned investors.

Because of the mediatics and excitement involved in this rally, people were increasing their stock purchases more and more. Some people were worried of allegations that others could be betting their life savings on the outcome – or that they could be resorting to loans.

While there is no way to be certain of the outcome, there is a simple reason why this could be a bad idea: investing always includes a degree of risk and excitement can cloud your outlook, leading you to a potential big loss.

Chasing performance and overlooking the need for a balanced portfolio could leave you too dependent on the performance of one, single asset. A single point of success also represents a single point of failure, when diversification is the paramount.

Fear and inaction have their own cost

On the other side of the emotional spectrum, fear can also leave someone worse-off in the long run.

Uncertainty and challenging times can make you wonder if this is the right time to start investing, or make you want to retreat from your existing position.

This, while understandable on some level, is detrimental to your potential gains.

Avoiding loss is not the point of investing. By definition, you already realize that there will be moments of loss in some parts of your portfolio. The secret lies in having it balanced and staying in long enough for the ups and downs to balance out.

In the end, time beats timing.

So if you thought to yourself that 2021 was a bad year for investing, you may need to think again.

What can you do?

First of all, you need to come to terms that you are not immune to your emotions. Following that, you need to prepare yourself for when those emotions do arise.

Simply put, you can arm yourself with a financial plan.

This will help you because you can define what you do beforehand, when reason is more in control.

Second, remember the importance of diversification, and to include assets that are more directed to providing stability. You may visit our marketplace to find out more about the investment solutions featured there. Not only do they aim for stability, they include diversification automatically, too. From €1 you can already give a first step.

And third, keep your goals at heart. Strong emotions can have a strong pull, but if you know what you want, you’ll be in a better position to stick to your plan.

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